Hua Hong Semiconductor's (HKG:1347) Sluggish Earnings Might Be Just The Beginning Of Its Problems

Hua Hong Semiconductor Limited's (HKG:1347) recent weak earnings report didn't cause a big stock movement. However, we believe that investors should be aware of some underlying factors which may be of concern.

View our latest analysis for Hua Hong Semiconductor

To understand the value of a company's earnings growth, it is imperative to consider any dilution of shareholders' interests. Hua Hong Semiconductor expanded the number of shares on issue by 31% over the last year. As a result, its net income is now split between a greater number of shares. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. Check out Hua Hong Semiconductor's historical EPS growth by clicking on this link.

How Is Dilution Impacting Hua Hong Semiconductor's Earnings Per Share (EPS)?

Hua Hong Semiconductor has improved its profit over the last three years, with an annualized gain of 182% in that time. In comparison, earnings per share only gained 146% over the same period. Net profit actually dropped by 38% in the last year. Unfortunately for shareholders, though, the earnings per share result was even worse, declining 45%. And so, you can see quite clearly that dilution is having a rather significant impact on shareholders.

If Hua Hong Semiconductor's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

Our Take On Hua Hong Semiconductor's Profit Performance

Over the last year Hua Hong Semiconductor issued new shares and so, there's a noteworthy divergence between EPS and net income growth. Because of this, we think that it may be that Hua Hong Semiconductor's statutory profits are better than its underlying earnings power. But on the bright side, its earnings per share have grown at an extremely impressive rate over the last three years. Of course, we've only just scratched the surface when it comes to analysing its earnings; one could also consider margins, forecast growth, and return on investment, among other factors. So while earnings quality is important, it's equally important to consider the risks facing Hua Hong Semiconductor at this point in time. At Simply Wall St, we found 2 warning signs for Hua Hong Semiconductor and we think they deserve your attention.

Today we've zoomed in on a single data point to better understand the nature of Hua Hong Semiconductor's profit. But there is always more to discover if you are capable of focussing your mind on minutiae. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.